Leveraging Monopoly Power by Degrading Interoperability: Theory and Evidence from Computer Markets

Christos Genakos, Kai-Uwe Kühn, John Van Reenen

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Abstract

When will a monopolist have incentives to leverage her/his market power in a primary market to foreclose competition in a complementary market by degrading compatibility/interoperability of her/his products with those of her/his rivals? We develop a framework where leveraging extracts more rents from the monopoly market by ‘restoring’ second‐degree price discrimination. In a random coefficient model with complements, we derive a policy test for when incentives to reduce rival quality will hold. Our application is to Microsoft's alleged strategic incentives to leverage market power from personal computer to server operating systems. We estimate a structural random coefficients demand system that allows for complements (personal computers and servers). Our estimates suggest that there were incentives to reduce interoperability that were particularly strong at the turn of the 21st century.
Original languageEnglish
Pages (from-to)873-902
Number of pages30
JournalEconomica
Volume85
Issue number340
Early online date6 Nov 2017
DOIs
Publication statusPublished - Oct 2018

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